Latin America

Mexico's President Moves Against Monopolies

October 12, 2009

For the past three years, Mexican President Felipe Calderón has waged an all-out war against powerful drug trafficking cartels, sending army troops on sweeps through major cities along the U.S.-Mexico border. Now he's starting another kind of war, this one against public monopolies that prevent the country from being internationally competitive.

In a surprise move on Oct. 11, Calderón sent federal riot police to take over the installations of state-run electricity distribution company Luz y Fuerza del Centro, or LyFC, and announced that he was closing the company down and laying off all 40,000 of its employees. Distribution is being taken over by the Federal Electricity Commission, or CFE, a much more efficient state-run company.

In a nationally televised speech announcing the takeover, Calderón said the company had been "losing one-third of the electricity it distributed because of theft, technical failures, corruption, or inefficiency." There was no other option but to liquidate the company, he said, "because time and resources were running out."

Not Much Movement on Promises Calderón's bold action came just days after the government refused to recognize the validity of elections in the company's powerful labor union, the Mexican Electricity Workers Union. The government alleged possible vote-rigging.

Several Mexican presidents, dating back to Carlos Salinas de Gortari in the early 1990s, had considered cracking down on the union so that they could turn around the money-losing company, which supplies energy to around one-fifth of the country, including the capital, Mexico City. But they all feared confronting the politically powerful union, which routinely threatened strikes and raised the specter of massive power outages if wage demands weren't met. And previous presidents balked at spending the estimated $1.5 billion that Calderón is planning to pay in severance—nearly twice the amount required by law—in order to encourage the electricity workers to walk away without a fight.

"Apart from cracking down on the drug traffickers, Calderón hasn't had much luck delivering on the promises he made while running for president," says Roderic Ai Camp, a professor of government at Claremont McKenna College in Claremont, Calif., and author of more than 20 books on Mexican politics and business. "By doing something dramatic like this on a substantive policy issue, he may reinforce his image as someone who is forceful and can lead," Camp says.

Annual Subsidies of $3 Billion The Business Coordinating Council, a major Mexican industrial association, applauded Calderón's decision, saying the electricity company's "exorbitant costs and constant losses…damaged the national economy and the public's best interests." But several opposition politicians, some with traditional ties to the electricity workers' union, said the government should have tried to negotiate a solution rather than eliminate the company altogether. "The solution should have been to reach an agreement—persuade, convince, and avoid a big conflict," said Mexico City Mayor Marcelo Ebrard, from the left-leaning Party of the Democratic Revolution.

In announcing the electricity company's closure, Mexican interior politics minister Fernando Gómez Mont said the government had been subsidizing it to the tune of $3 billion a year. That's nearly the same amount the government spends on its main anti-poverty program, which provides relief for 25 million families, and it's double the annual budget of Mexico's huge National Autonomous University, which has 270,000 students.

Luz y Fuerza del Centro also was very unproductive: It sold 730 megawatt-hours of energy per employee, compared with 2,500MWh per employee at the Federal Electricity Commission. LyFC had one worker for every 291 electricity clients, compared with one worker for every 627 clients of the CFE. And, the union demanded—and got—generous workplace benefits and pension perks that were unsustainable, Gómez Mont said: Retirees currently earn pensions that are 3.3 times the amount taken home by active employees.

Oil Production Declining More important, Gómez Mont said, the poor quality of the electricity distribution provided by LyFC meant that industries and retail operations in Mexico City and surrounding states—home to more than one-third of Mexico's gross domestic product—had to invest heavily in their own electricity substations to guarantee a steady supply of energy. The average retail chain in Mexico City has had to invest some $30 million in electrical infrastructure as a result, he said.

Calderón, who hails from the pro-business, center-right National Action Party, or PAN, promised that a cornerstone of his presidency would be a crackdown on the public and private monopolies that make it expensive and complicated to do business in Mexico, and that hurt the country's public finances.

But until now, he had done little to meet that campaign promise. Mexico's state-run oil monopoly, PEMEX, has a bloated, inefficient workforce and the powerful oil-workers' union fights fiercely to maintain privileges negotiated since Mexico became a major oil producer in the mid-1970s. That union has been run for 11 years by Carlos Romero Deschamps, an influential boss who was accused by the government of channeling $37 million in union funds to the presidential candidate of the Institutional Revolutionary Party, or PRI, in the 2000 elections. But PEMEX's problems go way beyond its labor union: The company's oil production is declining precipitously, in large part because the federal government used PEMEX as a cash cow and failed to invest sufficiently in exploration for new oil reserves.

Reluctant to Challenge Teachers Another obstacle on the path to greater competitiveness is the powerful National Teachers Union, or SNTE, which for the past 18 years has been run by labor boss Elba Esther Gordillo, who has steadfastly opposed teacher-evaluation tests. Mexico's students consistently score the lowest on international tests administered in member-countries of the Organization for Economic Cooperation & Development, or OECD.

So far, Calderón, who enjoyed Gordillo's support when running for president, has been reluctant to take on the militant teachers' union, which with 1.2 million members is the largest labor union in Latin America. But Raymundo Riva Palacio, a leading Mexican columnist, says that support is building within Calderón's cabinet to crack down on the teachers next. "The feelings against Gordillo are steadily heating up" inside the President's office, he wrote in an Oct. 12 syndicated column published online at the EjeCentral news Web site.

Calderón also has done little so far to crack down on powerful private monopolies, such as the two big television networks or the telephone and wireless companies run by Mexican billionaire Carlos Slim, which control between 72% and 90% of the Mexican market. High telecom costs make it expensive to do business in Mexico.

Camp, the professor and Mexico expert, says that while Calderón needs to crack down on inefficient state-run monopolies such as the electricity company, a real sign that Mexico is going to become more competitive will be when he figures out a way to rein in the country's powerful private monopolies, forcing more competition.